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Fareed Zakaria GPS

GPS: Interviews With Paul Krugman, Queen Rania

Aired October 19, 2008 - 13:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

FAREED ZAKARIA, HOST, GLOBAL PUBLIC SQUARE: This is GPS, the GLOBAL PUBLIC SQUARE. I'm Fareed Zakaria. Welcome to our viewers in the United States and around the world.
Regular viewers know that I usually end the program with a history segment. This time I'm going to start with one, because I have something special to say at the end of the show.

Twenty-one years ago this week, Wall Street went through one of its sharpest drops ever. On one day, October 19th, the Dow Jones Industrial Average dropped by 22.6 percent.

Now, it used to be when we made these historical comparisons the point was how those were the bad days of huge crashes, and today's drops -- while seemingly big because of the numbers -- in percentage terms were actually much more manageable.

Not anymore. The last three weeks have seen stock markets drop in points and percentages that rival most of the big ones.

The real difference between 1987 and today is likely to be that the 1987 stock market crash had virtually no effect on the real economy. This time it's coinciding with and causing a severe slowdown that could possibly become the worst recession in 35 years.

And yet, this is not a sign that the world is ending. Recessions are a part of our economic system. We just haven't had a major one in over a generation.

And that might be part of the problem. We've been lulled into a belief that somehow we could avoid serious slowdowns, cutbacks, downturns. And the chief culprit here is Alan Greenspan, who kept interest rates too low for too long.

William McChesney Martin, the chairman of the Federal Reserve from 1951 to 1970, once said that the job of the chairman of the Fed was to take the punchbowl away just as the party got going. Well, Greenspan acted as if his job was to spike that punchbowl to keep everyone happy.

Perhaps one of the lessons we'll take from these hard times is that you can't keep kicking the can down the road. Or as anyone who has ever been to a gym or on a treadmill knows: no pain, no gain.

So, now let's get started with GPS. I have some great guests: the economist Paul Krugman, who just won the Nobel Prize; the always fascinating Martin Wolf; also a special guest, Queen Rania of Jordan. And at the end of the program, I have a special something to say.

Stay with us.

(BEGIN VIDEO)

ZAKARIA: You've heard everyone say it: we are facing the worst economic crisis since the Great Depression. Markets have been swinging wildly.

I've gathered some experts to discuss how we got here, how we can out of this -- off this rollercoaster ride.

Martin Wolf, the widely read columnist for the "Financial Times," and the author of a new book, "Fixing Global Finance," that we all have copies of here.

Glenn Hubbard, the former chair of the Council of Economic Advisers under President Bush, currently the dean of the Columbia Business School.

And Joe Nocera, prolific author and the business columnist for the "New York Times." His column appears on Saturdays.

Martin, why is the fix not working? You wrote a column in which you said that the tide has turned. Basically, the governments have crossed the Rubicon. They're going to intervene. They're going to throw everything they need to at it.

The markets have sort of yawned. How should we take that?

MARTIN WOLF, COLUMNIST, "FINANCIAL TIMES," AND AUTHOR, "FIXING GLOBAL FINANCE": Well, I think the fact that the markets, as you put it, have yawned -- and more than that, have really been falling recently -- doesn't tell you anything about whether the fix will work. The question is what we mean by "work."

I think all they could do at this stage with the measures they have taken, is ensure that some sort of financial system will function as a financial system, particularly the core banking industry in the Western world, over the next few months or years.

That's not going to prevent what the markets have finally realized will be a very, very serious recession. The thing that I think we were very worried about is, if they didn't fix the financial problem, we would have got something much worse than just a very serious recession.

The markets, I think -- the stock market -- have been extraordinarily slow in the last 12 months in realizing that there's an enormous adjustment going on, and it is bound to lower growth and profits, and raise unemployment and make, in fact, the economic life of all our countries really miserable for quite a long time.

ZAKARIA: Quite a long time means years?

WOLF: Several years. ZAKARIA: Glenn, you are a conservative Republican. You worked for President Bush. He has just effectively quasi-nationalized the financial industry of the United States. He has effectively nationalized 50 percent of the home mortgage industry. He's insuring essentially every financial instrument in the country, all commercial paper.

Are you comfortable with all this?

GLENN HUBBARD, DEAN, COLUMBIA SCHOOL OF BUSINESS: Well, the question is how to jumpstart financial intermediation again. And it requires three things, and we've seen all three.

One is getting liquidity in the short-term markets. That's the Fed's job. Second is recapitalizing banks. As you said, that's the Treasury's job, and it was needed. The third, that hasn't really been done in a big way, is to stop falling house prices.

If we do those three things, that's the right response.

ZAKARIA: But you're comfortable with this massive government involvement, infusion, intervention.

HUBBARD: I'm very comfortable with it. I think it's exactly the right response. I think most economists argued for equity infusions, not for the original structure of the TARP plan.

For me the question is exit. How do you get out of this in normal times? That's a question I've heard very little about in Washington.

ZAKARIA: And what is the answer? Because even if you look at something like the federal government is now going to insure all money market funds -- and similar provisions are being put in place in Europe -- they say it'll expire December 31st. My guess is they'll have to extend it, because otherwise, January 1st of next year, all the money will leave.

And so, you're always playing this game of chicken, where you, you know, you can't withdraw the protection for fear of what will happen the next day. But yet, the government can't insure all this stuff indefinitely.

HUBBARD: That's right. We don't have the financial capacity to do that, nor is it the right political answer.

I think what we've got to do is define events that could happen in the future that unwind this, and then announce principles to do it. I would think that's job one for the next president and his Treasury secretary.

ZAKARIA: Joe, underlying this whole problem is the problem of falling house prices.

JOE NOCERA, BUSINESS COLUMNIST, "NEW YORK TIMES": That's right.

ZAKARIA: What should we do about that?

NOCERA: Well, you have to find a way, in my opinion, to keep people in their homes -- whether it's through government intervention, whether it's refinancing mortgages, or whether it's the scheme I wrote about on Saturday, which is, you know, you turn over your deed and you pay rent for a certain amount of time, and then you get a chance to buy back your house.

You know, if you have a way ...

ZAKARIA: Explain that. What will that do? Explain why that -- where that ...

NOCERA: Well, it would allow people to stay in their homes. It would -- you know, the person would have to take a hit, because they no longer own the home. The bank would have to take a hit, because they would get rental rates instead of mortgage rates. But, in essence, you have created the situation where you're stabilizing at least the foreclosures.

It's a terrible problem, because you have all these mortgage- backed securities, and they are continuing to drop in value, these securitized -- securitizations.

And one of the reasons there's so little trust in the financial system is because nobody knows how much further they're going to fall. And the reason they don't know how much they're going to fall is because they don't know how much more foreclosures, how many more people are going to lose their homes and are going to stop paying and have underwater mortgages.

This is a total connection between Main Street and Wall Street, and it's completely interconnected. You can't solve Wall Street without solving Main Street. And that's what has to be the next step.

ZAKARIA: Is one of the reasons, Martin, that this is going to be a more severe downturn than we've seen for a long time, is that everyone is leveraged, everyone is in debt?

The consumer is in debt, and some of that has to unwind. Governments are in debt, so it's difficult for them to, you know, truly spend their way out of it.

Why is it that we're in -- we're likely to see a very severe recession?

WOLF: I do actually think that, though governments are heavily indebted, we are going to spend ourselves out of the recession. We're going to have fiscal deficits in the Western world as a whole, which are going to be, as it were, unimaginable for some years. And the markets will swallow it, because they've got no other assets to buy now which they trust.

So, in the last resort, we will see -- I'm not saying as bad as Japan, where debt ratios for the country went to about 180 percent of GDP, but we're going to see extraordinary rises in debt. The reason I think we're going to have a huge problem is, first, the financial system is, whatever happens, very seriously damaged. Large parts of the non-bank financial system are clearly going to disappear. And that's going to affect intermediation.

But the deeper problem ...

ZAKARIA: Intermediation means ...

WOLF: Means ...

ZAKARIA: ... it's going to affect people getting credit.

WOLF: Credit. Credit is going to be very expensive and tight, and that is going to remain. But there's also this global, macroeconomic -- global picture, which I write about.

Essentially, I argue that, for the last eight or nine years, the U.S. consumer -- and more broadly, the consumer of the English- speaking world plus Spain, plus a few other countries -- have really been the buyers and borrowers of last resort for the whole world economy. They've been offsetting these gigantic surplus savings in much of the world, which is still running at about $1.8 trillion a year -- the surplus savings of the rest of the world.

And what this crisis is doing is, it's ending that. The U.S. household is clearly going to start saving. You can see it already. The spending is going to fall.

And there is no offset for this in the world system. There isn't anyone else out there that is really going to spend in a big way.

And that is going to create an underlying recessionary dynamic beyond the financial problem. And it'll take some years to recover from that -- rising savings, lower consumption, which we've already seen for a couple of years. And that is why the U.S. is actually growing now largely on the base of its exports.

But the rest of the world is now weakening. That's not going to even carry the U.S., let alone the rest of the world.

That's why I think it's going to be a very significant global slowdown. It's not just the U.S. It's happening in the U.K. It's happening in other English-speaking countries. It's happened in Europe.

And remember, in the end, U.S. and Europe are close to 60 percent of the world economy, even now.

ZAKARIA: Joe, Martin Wolf describes, in effect, a kind of deleveraging of the American consumer -- getting out of debt, saving more.

You wrote a fascinating book called "A Piece of the Action," which was all about how credit was created, how the Bank of America creates all these credit cards. And it turns out the American consumer just loves them, and racks up enormous debt, and that debt has become so much part of our culture.

Can we really -- one, this crisis is enough to turn back what you described as a kind of three- or four-decade-long process of accumulating it?

NOCERA: Well, you know, I think it is, because, I mean, if you think about the Depression and the effect that it had on our parents -- the psychological effect it had on our parents -- great economic events shape the way people act.

So, here we are. We've lived through this spendthrift era, this credit-heavy era -- not just people, but companies and governments and the entire world, really. And you have a world deleveraging. And people -- they're not going to have much choice in the short term.

The home equity line is gone, you know. That's how they financed a lot of things.

The credit card is about to be gone, because credit cards are now cutting people off. I've seen this. They're cutting people off, and they're raising rates to 35 and 40 percent, just to get them to pay it down. It's incredible. So, there's not going to be as much allowable credit.

And then there's the fact that people have to face up to the fact that the time has come to pay the price, and they're going to have to live within their means. And it is going to mean fewer vacations, smaller homes, you know, two cars instead of three or four.

That is going to happen.

ZAKARIA: But this is un-American. You're talking about doing something, you know, having a lower life, standard of living than you had before.

NOCERA: I don't see any other way that society is going to function, because you just -- nobody has the money.

ZAKARIA: And we will be right back with our panel.

(COMMERCIAL BREAK)

ZAKARIA: We're back with our panel of financial experts -- Martin Wolf, Glenn Hubbard, Joe Nocera.

Martin, declining living standards for Americans in the future?

HUBBARD: I don't see it. We will go through a period of adjustment, because of the housing crisis and financial crisis. But underlying productivity growth trends are very strong. They, in fact, drew their breath in part from very strong financial markets.

U.S. history is littered with the canal boom, the railroad boom -- fast forward, the tech boom and this. There's always carnage, but there's much, much upside for the future. That's where we are. NOCERA: I think there are two issues that make me more negative than that. One is the psychological trauma that we have, we are going through now, which I think is going to last for a very long time. I think that this is one of those defining events that changes the way people behave.

And then the second thing is that, as you mentioned, so much of economic growth has been built on spending borrowed money. And if that ratchets back for a significant amount of time -- as I believe it will -- if credit is more expensive and also harder to get, I think that will create slower growth for quite a long time.

So, I'm not saying there won't be growth. I just think it's -- I'm not as optimistic about, you know, even five, six years from now.

HUBBARD: I'm not so sure about the trauma in this. And this is not the 1930s. There has been aggressive policy response. There's certainly a lot of trauma on Wall Street. But I don't think Main Street is going to see the same kind of trauma that they did in the 1930s.

So, I think it will be a gradual response. It's like paraphrasing the old prayer of, you know, Lord, make me save, but not today, to paraphrase. And I think people will save slowly and get to the world that Martin describes.

WOLF: But they are. I mean, one of the most striking things, if you look at the national accounts, the figures on the U.S., is that just in the second quarter, household savings really jumped a lot. And suddenly -- really in one or two quarters, if you look at the financial balance of the household sector, you have the balance between income and expenditure -- suddenly, they're spending less than their income. It's very sudden.

That's been offset to some extent by exports. And that -- the U.S. has actually become an export-led economy, which is quite astonishing. But that depends on buoyant demand in the rest of the world.

Well, one of the things I think the stock market is realizing, that the rest of the world doesn't look too healthy anymore. This is a global shock.

And that makes more likely the idea, in my view, that this will be a three- or four-year slowdown and a period in which consumption, demand really grows slower than potential GDP, than output, because exports are rising. And it's not going to be very nice.

But beyond that period, unless we do something really stupid -- massive protectionism, that's something I would regard as really stupid, really bad fiscal policy, serious inflationary upsurge -- as long as we avoid those mistakes, I do believe we can get back to reasonable growth.

ZAKARIA: Glenn, you were chairman of the Council of Economic Advisers. Let's say you were in that job -- I know, unlikely, if, in all likelihood, President Obama is in the White House in January ...

HUBBARD: Don't bet on that yet.

ZAKARIA: ... what would you do?

What would -- what is the key -- what are the key issues that the next president is going to have to focus on? And how would you describe that, I mean specifically?

HUBBARD: Well, I think there are two things. One is, in regards to the current financial crisis, the next president really has to focus on restarting financial intermediation, making something like TARP -- if that's the way we're going to do it -- work. And then second, tackle housing.

But at another level, you have to get your principles right. We're facing a potentially toxic cocktail from a new administration of protectionism and raising taxes on capital at the same time, and then increasing the regulatory state. That's a dangerous mix in an economy like this.

ZAKARIA: OK. So, what you're referring to is Obama's tax proposals. Also, some of the rhetoric around trade and NAFTA. And then finally, on the, you know, regulation, just the generic sense ...

HUBBARD: The idea of using ...

ZAKARIA: ... there could be more.

HUBBARD: ... more regulation as opposed to smarter regulation.

And it's not just the idea of tax increases. It's tax increases on capital.

ZAKARIA: But Glenn, the government just took over the entire financial industry. Of course it's going to have to regulate it.

HUBBARD: We need to change regulation, there's no doubt about it. But doubling the number of people who missed it the last time doesn't strike me as the right answer.

A better answer would be to change the way we do capital requirements, and possibly create a new super-financial regulator in the U.S.

ZAKARIA: Well, I'm looking for magic wands here, Martin. So, what would you do, if you were advising President Obama, if they somehow waived the nationality requirements and allowed a Brit to be chairman of the council?

WOLF: If I were an American -- it's really controversial -- I would say you need a national sales tax. That is ...

ZAKARIA: To tax consumption.

WOLF: That is -- the income tax is too high here. You rely too much on it. All these states' sales tax are ridiculous, very distorting. I would go for a national sales tax. Every other significant developed country has one.

And now, I understand ...

ZAKARIA: That's never an argument for America to do anything, but ...

WOLF: Yes, I know. I know.

But actually, I do think -- leave aside this -- I'm prepared to bet on this one with you. Ten years from now, the average tax burden in this country will be considerably higher than it is today.

ZAKARIA: Doesn't it have to be, Glenn? I mean, we have mountains of debt. We have -- you know, we want a certain level of government. Nobody is in favor of abolishing Medicaid, Medicare. So, how are we going to pay for it?

HUBBARD: Well, that's really the issue. It's not even so much what we're spending right now or have spent in the past.

We have 70 trillion with a "T" dollars of unfunded liabilities in Medicare and Social Security. I don't think we can raise taxes to cover that. It would require crushing tax burdens. I think most of that's going to have to come on the spending side.

But I agree with Martin that, obviously, something here will come on the tax side. And this is a discussion of tax reform -- consumption taxes.

WOLF: Yes.

ZAKARIA: All right. On that moment of unanimity, thank you all very much.

And we will be right back.

(END VIDEO)

(COMMERCIAL BREAK)

ZAKARIA: This year's Nobel Prize for economics was won by Paul Krugman. Paul is also the "New York Times'" columnist. He's also a professor at Princeton University.

And I'm going to ask him now in his capacity as a professor to explain a few things to us. That's why we have the chalkboard -- Krugman 101.

First question, Paul, do you think that the fixes that have been put in place now -- that is, that the governments of the world basically seem to have decided we're just going to pour money into the system to recapitalize the banks, which is where we are now -- is that fundamentally going to fix this? PAUL KRUGMAN, NOBEL PRIZE WINNER FOR ECONOMICS, "NEW YORK TIMES" COLUMNIST AND PRINCETON UNIVERSITY PROFESSOR: You know, the U.S. have thrown $250 billion in. That sounds like a lot of money. But given the scale of the problem, it may not actually be a lot of money.

ZAKARIA: Britain is actually putting in more, given the size of its economy.

KRUGMAN: Right. They're putting in, effectively, half again that much relative to the size of the economy. And they may need to do more, as well.

And also, you know, there's this -- there is a panic out there. You can see. I mean, right now, the government took over Fannie Mae and Freddie Mac, which means that their debts are, for all practical purposes, government debts.

And yet, people are still reluctant to lend to them, because they're sort of saying, you know, I don't know. Is it really, really, truly a government debt? You know. And people are still rushing to buy Treasury bills, which are the only thing that people seem to think is safe.

So, even if -- this is going to be really hard. I mean, once you get to the stage we're in now, restoring even a sort of minimal level of trust is very difficult.

ZAKARIA: All right. Now that I have you and I have the blackboard, explain to me, what did you win the Nobel Prize for?

KRUGMAN: OK. Yes. I'll draw you a picture. OK?

So, this is the temperate countries, temperate zone countries, and these are tropical. Think about it that way. Right?

And this is not the only -- but the traditional trade theory looks like this. Well, you know, these are different. These countries are different. And so, well, you know, the tropical countries are going to sell bananas to the temperate countries, and the temperate countries are going to sell wheat to the tropical countries. And trade is going to be about how countries are different. And that's the theory of comparative advantage. And, of course, there's much more to it than that, but that's the basic story.

ZAKARIA: And this is sort of what David Ricardo said, which is ...

KRUGMAN: Right.

ZAKARIA: ... the British and temperate countries would sell textiles to the Portuguese. They would make wine ...

KRUGMAN: Right.

ZAKARIA: ... and sell it back to the British.

KRUGMAN: So, and that's a good story, and it's probably about half of world trade.

Actually, if you're going to go back, in 1913 it was most of world trade. If you looked, you know, trade was European countries trading with their colonies, or former colonies, and manufactures for raw materials.

But if we were looking at the world around 1980 -- which is when I started doing this stuff -- what you would have found is that a large part of world trade was back and forth among the industrial countries. A lot of the trade was France trading with Germany, the United States trading with Canada, and actually trading similar looking things back and forth. So ...

ZAKARIA: So, like that, (UNINTELLIGIBLE) the Americans buying cars from Sweden ...

KRUGMAN: Right.

ZAKARIA: ... when they're similar countries.

KRUGMAN: Yes. So, in fact, in the case -- one of the classics was in 1964, we signed a free trade agreement in automobiles with the Canadians. And suddenly there was huge trade in automobiles and automotive products back and forth across the U.S.-Canadian border -- in some cases actually the same model of car being shipped both south and north in different parts of the continent.

ZAKARIA: And so, you try to answer the question, why is that happening.

KRUGMAN: That's right.

And the story that I and others came up with is that -- it sounds obvious in retrospect -- there are economies of scale. There are -- you don't want to have 200 car plants producing a given model of car. In general, you want only a few.

Or if you look at something like aircraft, there are basically two places in the world where wide-body passenger jet aircraft are manufactured, because of the economies of scale. It's extremely inefficient to have very small plants. You want to have just a few.

And wherever that plant is, whatever country it's in, it's going to be exporting those goods to the rest of the world.

So, why does ...

ZAKARIA: Even to countries that have the same kind of endowments. That is to say, they're capital-rich countries. They have -- their labor ...

KRUGMAN: Right.

ZAKARIA: ... costs the same amount.

KRUGMAN: Yes. So, I mean, why does the United States export wide-body jets to Japan? Is it that the Japanese are incapable of doing that? You know, probably if they had gotten there first, they would be better at it than we are. We got there first, so we're better.

But the main point is that there are just these enormous advantages to producing them in just one place.

Now, people were sort of aware of that, but then they got really bogged down on the question: Well, what determines where that aircraft plant is? What determines why is a particular model of car produced here rather there?

And what I and some other people realized was that, actually, that wasn't an important question to answer. What really matters is -- you know, because there are lots of goods like this. And the real -- you want to sort of step back, step back from the blackboard and take off your glasses, and realize that the broad pattern is what matters.

There are lots of goods. Every country is producing a different set of goods. They may be only slightly differentiated, but enough so that people are buying.

The economies of scale mean that you don't produce the same set of goods in each country. And so, you get all of this back-and-forth trade among even similar countries, which is, you know, something like half of world trade, and is a big source of trade that sort of gains from trade.

It's actually, mostly a pro-free trade argument, though there are some possible market imperfections that might lead you to do something different.

ZAKARIA: And that imperfection is this. If it turns out that, by getting to someplace first you can accumulate the advantage -- so, by setting up the aircraft industry first, you can be the world's aircraft producer -- it might make sense for governments to help countries get there first.

KRUGMAN: If producing aircraft is an especially good thing to do.

ZAKARIA: What was the equation that won the Nobel Prize look like?

KRUGMAN: It's not one equation, but, you know, you start with preferences that look like -- where n is a very large number. And then you start working forward from there. So ...

ZAKARIA: All clear.

KRUGMAN: ... perfectly clear.

ZAKARIA: Thank you, Paul.

KRUGMAN: Thanks a lot. (COMMERCIAL BREAK)

ZAKARIA: Known around the world for her intelligence, elegance and outspokenness, Queen Rania of Jordan has divided opinion between those who feel she should take a more traditional role and those who see her as a shining example for modern Arab women.

She was in New York recently, and she joined me to talk about the role of women in Islam and how to promote the voices of moderation within that religion.

(BEGIN VIDEO)

ZAKARIA: Queen Rania, thank you so much for doing this.

RANIA AL ABDULLAH, QUEEN OF JORDAN: Thank you. It's a pleasure to be here.

ZAKARIA: Let me ask you, you're probably the best-known face of women in Islam. And many people talk about Islam, and they worry particularly about the role of women in Islam. And they feel that Islam has placed women in a subordinate and subjugated role.

How do you react to that charge?

QUEEN RANIA: Well, I personally think that Islam, in and of itself, does not subjugate women and does not hold them back. But certain people choose to interpret Islam in a way that does hold women back.

Now, you might ask, why would they do that. And I think there's a lot of men, in particular, choose those interpretations in order to validate and justify their own conservative, traditional and sometimes chauvinistic attitudes.

So, what we need to be looking at is some of these traditional mindsets. We need to challenge some of those attitudes, the social attitudes that hold women back. And that's what we need to focus on.

It is not necessarily that you have to look at, you know, Islam itself. Holy scripture does not hold women back. It's the people that decide to interpret it in such a way for their own, sometimes political, agendas.

The other thing is that, in many of the Muslim countries, they suffer from economic problems. And what I've found, and what development has shown, is that whenever people feel the pinch, whenever the going gets tough, the first to get sacrificed are women. You know, they are always the last in the door and the first out the door. And so, when there's hardship, women's rights tend to suffer.

And so, if you combine those two things -- economic hardship as well as age-old mindsets and very conservative attitudes -- and then you find that women are really sort of suffering. But ...

ZAKARIA: But we see all over the Muslim world women choosing a more traditional form of dress. So, for instance, the first time I went to the Middle East in the early '70s, you'd find women, frankly, dressed as you are. And now you go to Cairo or to Amman and you see more and more of the chador or the veil.

There is a kind of conservatism and religiosity that has taken grip in the Muslim world.

QUEEN RANIA: Again, I think it has more to do with the cultural aspects, with the political climate, with the economic climate, with the social situation in those countries.

A lot of women feel the pressure to dress in a certain way ...

ZAKARIA: Why?

QUEEN RANIA: ... because that's what society -- that's what society pressures.

I mean, again, you know, political leaders sometimes, who have certain agendas and justify them through Islam, put pressure on women to dress in a particular way. Sometimes it's not their own choosing. And sometimes they just feel embarrassed not to be dressed in that particular way.

So, I think we need to look at it deeper. It's not a matter of just religion, because Islam has been around for a very long time. Why is it that we're suddenly seeing this rise, as you're saying, in conservative practice?

For me it has much more to do with the environment in the Arab world rather than the religion itself.

ZAKARIA: Well, do you ...

QUEEN RANIA: And with the ...

ZAKARIA: ... ever get criticized for not wearing a veil?

QUEEN RANIA: Absolutely, you know, very often. But likewise, there are many women like me who do not wear the veil. So, as long as it's a choice.

I have nothing against the veil. And I think that wrongly, many in the West look at the veil as a symbol of oppression.

Now, as long as a woman chooses to wear the veil, because that's her belief and because of her own -- that's a personal relationship with God, so she should be free to dress in whichever way she wants.

And we should be smarter than to apply more meaning to a symbol of clothing than we should, because, you know, all over the world there are many symbols of dress and many ways of prayer, et cetera. We shouldn't judge people through the prism of our own stereotypes.

And I think there has been a stereotype that has developed over -- in the Western world of a women -- a veil means oppression, you know. That is not necessarily the case.

And unfortunately, these stereotypes have been very dangerous between East and West. And we really need to start challenging them, because, you know, they really rob us of accurate perspective.

ZAKARIA: There are also many prejudices about the West in the Arab world.

QUEEN RANIA: Absolutely.

ZAKARIA: When you poll Arabs, they still -- 30 percent feel that 9/11 was something that was actually perpetrated by the American government.

How do you -- how does one change that?

QUEEN RANIA: There was an interesting Gallup poll that came out earlier this year in which they asked many in the West if they thought that the Arab world was interested in improving relations. And the majority said, no, they don't.

And likewise in the Muslim world, they asked if the West was interested in improving relations. And they said, no.

But on the positive side, overwhelming majorities on both sides said that the quality of the relationship between East and West is something that is important to them.

So, the problem is not that people don't care. It's that they don't see their care reflected. So, it's very important for us to start creating platforms for dialogue.

I, for example, did a small -- I had a small project on YouTube, where I had a page, and I encouraged people to send in their stereotypes, and we started to try to challenge them. And, you know, the idea was to get people to question their assumptions and to question certain beliefs that they held to be true.

And that was a very enlightening experience, because there was a lot of anger out there. There was a lot of misunderstanding. There was a lot of ignorance.

But that is just a drop in the ocean of what needs to be done. I think we need to take these initiatives at all levels.

ZAKARIA: But in some communities, it isn't just a small minority. If you look at, for example, the Palestinian community, I mean, you are yourself Palestinian. But if you look at the Palestinians in Gaza, they elected Hamas and a Hamas government.

How should the West deal with the situation where you have an elected government that espouses a certain kind of terrorism, does not believe in a two state solution to the Israeli-Palestinian problem?

QUEEN RANIA: Well, in my mind, the success of Hamas has been a result of the failure of the international community to deliver to the Palestinian people. In my mind, their success has been a result of the sense of hopelessness and helplessness of the Palestinian people.

They really could see no end of the -- no light at the end of the tunnel. And they were perceiving the Palestinian Authority through the government of Mahmoud Abbas as being inefficient, as not delivering. You know, their way of life has been going from bad to worse.

If you look at Gaza, for example, unemployment is now at over 50 percent. Over 80 percent of the people living there rely on U.N. organizations for food, for example.

So, you know, this is a situation that's not tolerable. They don't have access to basic health services, schools. Roadblocks are all over the place, so you can't even move.

So, in a situation like that, I think out of desperation people must have elected Hamas, because Hamas were viewed as providing social services, of, you know, giving -- opening kindergartens for kids, of providing education for girls, et cetera.

But at the end of the day, the Palestinian Authority is the -- we view it as the legitimate representative of the Palestinian people. And the sooner the infighting inside of the Palestinian camp ends, the sooner they can start having a unified stand that really delivers to the Palestinian people. Because at the end of the day, it's the Palestinian people who are paying the price.

And the onus is on the international community to try to embolden and strengthen the moderate hand, so that the moderate hand can show that it's delivering to the people. And that's where they will be able to have more power and more leverage.

I don't think people by nature are extremists. You will never find a population of extremists. Extremists have existed throughout the centuries on all religions. And what happens is, extremists start to have more leverage when the situation is bad.

ZAKARIA: And we will be right back.

(COMMERCIAL BREAK)

ZAKARIA: We're back with Queen Rania of Jordan.

In a broader sense, looking at the Middle East, do you think that the forces of moderation are winning? Do you think that, if you will, between the Dubai model and the al Qaeda world model, Dubai is winning?

QUEEN RANIA: I wouldn't say that -- I wish I could say that conclusively.

I think a lot depends on the political process. I think if we can deliver on peace, and if we can -- I think it depends on two things: the political process, such as delivering on peace, and I think it depends on the government's abilities to look just -- look beyond just the economic gains. I think a lot of investment needs to be done in the human capital in the Arab world, in changing the social landscape. We shouldn't just be looking at investment in education expansion, for example. We need to reform our education system, you know, make sure that we have the right curricula for our young people, make sure that we invest in labor-intensive areas so that we can provide jobs.

You know, one in four young people in the Arab world does not -- is unemployed. We're talking about 70 million young people in the Arab world. One in five live below the poverty line. So, in the Arab world we need to create five million jobs every year, just to prevent a rise in unemployment.

So, that kind of vision is necessary.

ZAKARIA: Do you feel as though those kinds of forces that are trying to work to a more modern interpretation of Islam are willing to condemn the more backward forces?

There's a lot of people who feel that, in the world of Islam, the moderates are too scared. They don't speak out. They're, you know ...

QUEEN RANIA: Moderates generally can be a little complacent, whether it's in the Arab world or elsewhere. That's why you find that the extremists are always the ones with the loudest voices.

And what I would -- and I find that very frustrating, because I often try to send the message that, although most -- I mean, to be honest, let's be very frank about this -- most terrorist attacks in recent history have been conducted by Muslims.

But what I'd like to remind people is that these are not -- Muslims are not -- the majority of Muslims are not terrorists. And although these people are maybe the loudest in Islam, but they're not the majority. And they're certainly not representative. These are misrepresentatives of Islam.

ZAKARIA: And finally, you have four children, and you are a very busy, talented, accomplished woman.

QUEEN RANIA: Thank you.

ZAKARIA: Sarah Palin has five children and is in the midst of hoping to become vice president.

What advice would you give to a working mother of four or five children? How do you manage to make it all happen?

QUEEN RANIA: Never manage to make it all happen, and never expect to make it all happen. I think, you know, the first thing that you need to do is to be kinder to yourself.

Many women think that they have to achieve that perfect balance between family and work and everything else. And that balance just does not exist. There are some days when you feel it's all -- you've got everything under control, and other days where it's just all chaotic.

It's about, you know, reorganizing your priorities every day, about being flexible, about accepting help and asking people to assist you. And it's about having a bit of a sense of humor, and just being kind to yourself.

ZAKARIA: Queen Rania, thank you so much for being on the show.

QUEEN RANIA: Thank you very much for having me.

(END VIDEO)

(COMMERCIAL BREAK)

ZAKARIA: OK. We're in the home stretch, two weeks and two days away from the presidential election.

Now, many of you have e-mailed and asked me whom I will vote for. Since I tell you what I think about most things, I figured I shouldn't dodge this one. So, let me tell you whom I will vote for and why.

I think we have two good candidates. Both are serious people with an obvious commitment to the United States. Both are knowledgeable and substantive. Both talk about reaching across party lines to solve the country's problems.

But I think one is distinctly better for our times.

As I've watched John McCain discuss the current economic crisis, I couldn't help but think that he was really out of his element. His response to questions about the crisis and the rescue package tended to all be about cutting taxes, keeping government small, ending earmark spending.

This is a recitation of 30-year-old Republican orthodoxy and feels irrelevant to the problems we face today.

To get a sense of how divorced from reality McCain is on economics, consider this. He is still promising to balance the federal budget by the end of his first term, while offering large new tax cuts. In reality, the deficit is likely to be $1 trillion. Balancing it would require not good government policies, but magic.

On foreign policy, McCain is a relentless warrior. He wants to fight in Iraq, openly threatens to bomb Iran, is skeptical of the Bush administration's diplomacy with North Korea. He wants to kick Russia out of the G-8, humiliate China by keeping it also out of that body. He sees a world in which a league of democracies will tussle with an alliance of autocracies.

It's a Cold War strategy for a post-Cold War world.

By contrast, Barack Obama has been calm, sensible and intelligent on both economics and foreign policy. His proposals to respond to the financial crisis have been careful, measured and attuned to the moment we're in. Some of them have been adopted by the Bush administration already.

He wants limited tax cuts for the middle class, but also major new investments in infrastructure and alternate energy.

On foreign policy, he argues for greater international cooperation and the aggressive use of diplomacy. He sees a world in which America doesn't have to fight with everyone, and should instead work with other countries to solve the common problems we all face.

I repeat, these are two good men, but with two very different views of the world.

John McCain represents the best of America's past, and Barack Obama the hope of the future -- the hope of a country that can make big changes and live out one of its greatest promises, of equal opportunities for all Americans, of every caste, creed and color.

And America has always been a country that looks forward. So, I will be voting for Barack Obama on election day this year.

That's it for this week. But before I go, I want to thank you for all your e-mails.

Last week I asked you what country you thought would come out best from this economic crisis we're in. Answers came from all over the world, and many of you were champions of your own economies. Sweden got many votes, as did Canada, and a number of oil-based economies fared well.

But the winner was China. Viewers of this program are greatly impressed with its economic growth and management, and they don't expect it to slow down that much.

Now, my question for you this week is: How long do you think this downturn will last?

I'll give you two choices -- the two most divergent predictions I've heard from economists this week. Will it end within one year? Or will it take four years -- a lengthy slog in which we slowly rebuild a more sound and solid financial system?

Also, I want to recommend a book written by Joe Nocera, "New York Times" columnist and one of our panelists. Back in 1995, he wrote a book called "A Piece of the Action." It's a wonderfully clear and understandable book explaining exactly how Americans became so addicted to credit, and how Wall Street profited from that addiction. I think you'll like it.

Remember, you can e-mail me at fareedzakariagps@cnn.com. You can also visit our Web site, cnn.com/gps, for highlights from this program. And you can always find our weekly podcast on the Web site.

That's it. Thank you, and I will see you next week.